Despite the temptation, the market and regulatory risks are too great
Is now the time for individual investors to put some money in bitcoin?
It’s a question that financial advisers increasingly hear these days. With bitcoin up more than fourfold this year and a series of high-profile “initial coin offerings” raising more than $2 billion in total, according to CoinDesk’s ICO Tracker, the number of investors interested in digital currencies has been picking up, wealth-management professionals say. Earlier this week, bitcoin was trading at more than $4,880.40 after ending 2016 at around $968, according to CoinDesk.
Yet advisers for the most part don’t recommend investing in digital currency or in the few investments vehicles that have cropped up. There are a number of market and regulatory risks inherent in trading cryptocurrencies. Bitcoin and similar digital currencies may offer investment opportunity in the future, advisers say, but for now they remain speculative bets that investors should be wary of or avoid altogether.
“While the potential upside is alluring, the significant risk of loss is incompatible with prudent investing for long-term goals like college savings, buying a home or retirement,” says Julie Ford, founder of Ford Financial Solutions in New York.
Ford says she had a 45-year-old client recently come to her with a plan to liquidate a majority of her retirement savings and invest the proceeds, after taxes and penalties, in bitcoin.
Risking anything above a trivial amount in cryptocurrencies isn’t advisable, she says. Anyone contemplating such a move should be debt-free; have an appropriate amount of emergency savings; be on track with financial goals such as retirement or college savings; and have a healthy cash flow.
Ups and downs
Bitcoin, which goes back to a 2008 blueprint, has a history of price swings related to security breaches, hacking and regulatory scrutiny and action. Trading for about $13.50 at the beginning of 2013, it soared to more than $1,200 before falling about 50% that December after China’s central bank barred financial institutions and payment companies from handling bitcoin transactions.
In early 2014, it plunged again when Tokyo-based Mt. Gox, one of the biggest bitcoin-trading platforms at that time, filed for bankruptcy protection after being beset by security breaches, theft and shutdowns. Bitcoin declined nearly 40% from Feb. 1 through the end of March 2014.
“It’s very difficult to use something as a currency when its value is fluctuating as much as bitcoin is,” says Tracie McMillion, head of global asset allocation at Wells Fargo Investment Institute, a registered investment adviser subsidiary of Wells Fargo & Co. WFC, -0.13%
Advisers point to regulatory uncertainty as another risk factor. Government authorities could restrict or control the use and sale of bitcoin or other digital currencies.
No U.S. mutual funds or exchange-traded funds currently track bitcoin, but several firms are trying to bring such investments to market. Regulatory approval of cryptocurrency investment funds could bring legitimacy to the asset, or rejections could shake investor confidence.
When an application to bring a bitcoin ETF to market from venture capitalists Cameron and Tyler Winklevoss was initially denied by the Securities and Exchange Commission, bitcoin, which at that time had been trading as high as $1,326 in anticipation of an approval, fell to as low as $1,022. The SEC decision on that ETF is under review.
Similarly, the price of bitcoin and another popular cryptocurrency, ether, tumbled in late July after the SEC indicated in a report on a specific coin offering, called DAO, that U.S. federal securities law may apply to some cryptocurrency activities, which could bring heightened scrutiny.
In September, bitcoin’s price plummeted for days after China said it would shut down the country’s bitcoin exchanges. The virtual currency recovered, then faltered again when South Korea said it would ban raising money through all forms of virtual currencies.
But some regulators appear to be embracing cryptocurrencies. Japan’s Financial Services Agency in late September officially recognized some companies as registered cryptocurrency-exchange operators.